Capital Product Partners L.P.

Q2 2021 Earnings Conference Call

7/30/2021

spk02: Thank you for standing by, and welcome to the Capital Product Partners Second Quarter 2021 Financial Results Conference Call. We have with us Mr. Jerry Kallouratos, Chief Executive Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone I must advise you that this conference is being recorded today. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns, and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocations, as well as our expectation regarding market fundamentals and the employment of our vessels, including re-delivery dates and charter rates, may be forward-looking statements, as such as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume the responsibility for the accuracy and completeness of the forward-looking statements. We make no predictions or statements about the performance of our common units. I would now like to hand you over to your speaker today. Mr. Kalogiratos, please go ahead, sir.
spk01: Thank you, Valerie, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. The partnership's net income for the second quarter of 2021 was $35.4 million, or $10 million, excluding a gain of $25.4 million from the sale of the CMA CGM Madalena in May 2021, compared with a net income of $8.7 million for the second quarter of 2020. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the second quarter of 2021. The second quarter cash distribution will be paid on August 10th to common unit holders of record on August 3rd. The partnerships operating surplus for the second quarter was 23.5 million or 15.2 million after the quarterly allocation to the capital reserve. In addition, and as stated, we concluded on May 17th the sale of the CMA-CGM Madalena. Since the launching of the unit repurchase plan on February 19th, And as of June 30th, we repurchased approximately 331,200 common units at an average cost of $1,165 per unit. Finally, the partnership's charter coverage for 2021 and for 2022 stands at 92% and 85% respectively, while the remaining charter duration corresponds to 3.9 years. Turning to slide three. Revenues for the quarter were 39.8 million compared to 36.6 million during the second quarter of 2020. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of three Panamax containers in February 2021 and the decrease in the net amortization of time charters acquired together with certain of our vessels. The increase was partly set off by the decrease in the average daily charter rate earned by the vessels in our fleet and the sale of the CMA CGM Madalena in May 2021. Total expense for the quarter were 25.6 million compared to 22.7 million in the second quarter of 2020. Voyage expense for the quarter increased to 2.2 million compared to 1.3 million in the second quarter of 2020, as currently our sole dry-bulk vessel, the Cape Agamemnon, trades in the dry-bulk spot market. Total vessel operating expenses during the second quarter of 2021 amounted to 11.7 million compared to 9 million during the second quarter of 2020. The increase in vessel operating expenses was mainly due to the increase in the size of our fleet following the acquisition of the three vessels in February 2021. Total expenses for the second quarter of 2021 also included vessel depreciation and amortization of 10.1 million compared to 10.5 million in the second quarter of last year. The decrease in depreciation and amortization during the second quarter of 2021 was mainly attributable to the classification of the vessels CMA-CGM Adelena and Adonis as vessels held for sale, partly offset by the increase reflecting the acquisition of the three Panamax container vessels in February 2021. Upon the delivery of the CMA-CGM Adelena to its new owners, In May, we recognized a gain from sale of 25.4 million, representing the difference of the net proceeds we received from the sale and the vessel's net book value upon delivery. General administrative expenses for the second quarter of 2021 amounted to 1.7 million as compared to 1.8 million in the second quarter of last year. Interest expense and finance costs decreased by 1 million due to the decrease in the LIBOR-weighted average interest rate, compared to the second quarter of 2020, and the decrease in the average long-term debt outstanding during the period. The partnership recorded net income of $35.4 million for the second quarter, compared with net income of $8.7 million for the second quarter of 2020. On slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately 23.5 million in cash from operations for the quarter before accounting for the capital reserve. We allocated 8.3 million to the capital reserve, a decrease of 1.8 million compared to the previous quarter, resulting from a decrease in our scheduled quarterly debt principal payments due to the sale of the CMA, CG and Maddalena earlier this year. After adjusting for the capital reserve, the adjusted operating surplus amounted to 15.2 million. On slide 5, you can see the details of our balance sheet. As of the end of the second quarter, the partners' capital amounted to 461.7 million, an increase of 39.6 million compared to 422.1 million as year-end 2020. The increase reflects Debt income for the six months ended June 30th, and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in the total amount of 3.8 million, and the repurchase of partnerships common units for an aggregate amount of 3.9 million. Total debt decreased by 32.1 million to 347.6 million, compared to 379.7 million as of year end 2020. The decrease attributable to the sale of the Maddalena and their respective debt repayment and their respective financing arrangement in a total amount of 49.6 million and to schedule principal payments during the period, partly offset by the 30 million sale and leaseback transaction and the seller's discredit agreement in the amount of 6 million in connection with the acquisition of the three Panamax container vessels in February 2021. Total cash as of the end of the quarter amounted to 112.2 million including restricted cash of 8 million. Turning to slide 6, the partnership has concluded the sale of CMA-CGM-Mandalena, and the vessel was delivered to its new owners on May 17th. The transaction generated gross proceeds of approximately 49.4 million after repaying outstanding debt. Although the vessel was recognized in the partnership's books at an acquisition cost of $88.5 million, the cash consideration paid for the acquisition of the vessel in 2016 was $81.5 million, where the difference represented the value allocated at the time to the specific vessel for resetting the partnership's IDRs, incentive distribution rights, that is, adjusted by the value of the above-market acquired charter. We now expect the sale of the sister ship Adonis to be concluded in November 2021 after the vessel completes its current time charter employment or potentially earlier if we come to an agreement with current charters and the buyer for the innovation of the charter party. We expect the sale to result in gross proceeds of approximately 49.4 million after repaying outstanding debt. Moving to slide 7, following the sale of the Maddalena, the partnership's charter coverage for 2021 and 2022 corresponds to 92% and 85% respectively, while the remaining charter duration amounts to 3.9 years. Looking ahead, all our container vessels are under long-term charters. The earliest charter expiry is our remaining 9,000-EU vessel, Akadimos, in March 2022. Charters have a six-month option until September 2022, declarable in early February 2022, in which case the day rate will increase from $31,500 to $35,000 per day. The Cape Agamemnon continues to trade in the spot market, having earned approximately $26,000 per day for the second quarter of 2021. As previously discussed, we believe that the opportunistic strategy we have followed for this vessel has paid off, as we have seen a material improvement, both in terms of the underlying charter market, as well as the value of the vessel. The Cape Agamemnon is now expected to open up again in mid-August for new business, with current market being estimated in the mid to low 30,000 for an Australia to China round. We will continue to monitor the dry bulk market closely as the recent increase in asset prices makes the opportunistic divestment of this asset more attractive. On slide 8, we review the container market. The second quarter of 2021 saw further increases to charter aids and longer periods being fixed for all sizes. Currently, charter aids in all segments are at an all-time high. And the standard 8,500 TU container has gone from fixing around $17,000 in the second quarter of 2020 to over $40,000 for a five-year period in the first quarter of 2021 to presently low $60,000. That is, of course, if there are any prompt ships available. The driving force for the very strong improvement in the container market is the increase in container demand due to unprecedented fiscal stimulus measures pent up demand, as well as changing consumer spending patterns. Overall demand growth for full year 2021 is expected at 6.6%. At the same time, the supply side remains very much disrupted due to shortage of equipment, port congestion globally, and general COVID-19 related problems all around the world. Supply growth for 2021 is estimated at 4.5%. As a result of the extremely high rates, the container order book has increased to 20% of the total fleet capacity. Importantly, if all options and letters of intent out there are exercised, the actual order book could be well higher. This needs to be compared against an order book of just short of 11% at the beginning of the fourth quarter of 2020. 2023 and beyond seems especially heavy on deliveries, with presently 3.5 million TU scheduled for delivery. As of quarter-end, slippage in TU terms of new building container vessels amounted 22%, including cancellations, whereas demolition year-to-date stands at only 13 units of 10,000 TU capacity versus 79 units of 190,000 TU capacity last year. Due to the increased vessel ordering, new building prices have increased rapidly, with most yards now being fully booked beyond 2023, especially for larger container vessels. The fall of the U.S. dollar, the increase in steel prices, and inflationary pressures on equipment costs have also resulted in upwards pressure on prices. While we believe that the container charter market has legs in the short to medium term, on the back of strong momentum and supply-demand dynamics, we remain cautious on the long-term prospects of the container market. The longevity of the container freight and charter bull market is closely intertwined with the developments of the COVID-19 front including the rollout pace of vaccines, virus mutations, and their impact on quarantine measures globally, and other demand and supply drivers, such as the change in consumer behavior and supply chain disruptions. An easing of the logistics chain disruption going forward, combined with a more balanced spending pattern between manufactured product and services, could have an adverse effect on demand for container vessels that could lead to a weaker market. This could be further exacerbated if it coincides with increased vessel deliveries from the back of the now inflated order book. Turning to slide nine, as we have discussed in the previous earnings call, the partnership has access to a number of assets with employment in place that could be potential drop-down candidates, including six XDF LNG carriers and three eco-container vessels. Out of the six LNG carriers, three are in the water and other three will be delivered by the end of the third quarter this year. All of them have medium to long charters in place to investment-grade counterparties. In our view, an investment in LNG carriers would allow us to deploy equity in vessels that are currently in the water with an immediate return and would come at the moment in time that the LNG charter market and its fundamentals are at an inflection point. Apart from the LNGCs, the partnership will be considering the acquisition of three latest ecotype 13,000 TU container vessels currently under construction at Hyundai Shipyard in South Korea, and due for delivery from November 2022 to May 2023. As previously communicated, the three vessels have secured employment with Hapag-Lloyd for a maximum period of 14 years, including options. Moving to slide 10, I would like to conclude by reiterating the strategy of the partnership going forward. We believe that by releasing the equity locked into the two vessels we sold and the increased liquidity from internally generated cash flows, we'll have a unique opportunity to achieve a number of objectives for the partnership at a larger scale while we continue to return capital to our unit holders. Firstly, continue to grow the partnership's fleet with the aim of concluding first and foremost accretive transactions to our earnings and distributable cash flow. At the same time, we will seek to reduce the partnership's fleet average age as well as its environmental footprint. With regard to the latter, we expect ESG considerations, and especially the environmental footprint of the industry, to come under increased scrutiny in the future. The inclusion of vessels' emissions in the EU carbon trading scheme or other forms of taxing emissions, in addition to the increasingly heavier IMO regulatory framework when it comes to emissions, are expected to increasingly penalize older and less efficient vessels. Hence, we aim to focus going forward on modern vessels, take into account their emissions profile, as well as their contribution towards reducing the partnership's footprint. For example, the LNG carriers we discussed earlier, which use natural gas for their propulsion, reduce CO2 emissions by almost 30% compared to fuel oil propulsion, and deliver 100% reduction in CO2 sulfur oxides, and 85 percent in nitrous oxide emissions, while particulate matter emissions fall by 95 to 100 percent. We have also estimated that the new building 13,000 EU container vessels, assuming the same trading speed with the two 9,000 EU vessels we sold, are expected to save 30,000 tons per year of CO2 due to their innovative design, fuel-efficient engines, and a series of energy-saving devices and improvement. Again, assuming a price of $50 per ton for CO2 emissions, that would imply a monetary benefit of $1.5 million per vessel per year, or $4,000 per day. Finally, and with the above in mind, to the extent we can take advantage of increased asset prices, we will continue to look for divestment opportunities for older tonnage. We are fortunate to have access in this endeavor to a substantial asset pipeline with medium to long-term chapters in place, as described earlier, amounting to approximately 1.5 billion in value, with an estimated annual EBITDA of approximately 155 million. Our preliminary estimates show that the acquisition of any combination of these assets would be highly accretive to our earnings, will enhance the sustainability of our common unit distribution, and create the basis for increasing the distribution in the future, while materially improving the average age of our fleet, as well as the environmental footprint of the partnership. In addition, the medium to long-term charters of these vessels will ensure long-term cash flow visibility beyond 2024 and 2025, when most of our existing charters expire and certain of our vessels approach their 20th anniversary. As we think about these potential acquisitions, it is important to note that we are going to prioritize internally generated cash flows and taking over the existing debt in place, as well as explore avenues of raising additional capital. We are making progress on the above considerations as we are in advanced discussions with the Partnerships Board, and I hope that we will be able shortly to communicate to the market our plans in this regard. And with that, I'm happy to answer any questions you may have.
spk02: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please state your full name and company name before you ask your question. If you wish to cancel your request, please press star 2. Once again, please press star 1 if you wish to ask a question. We will not take our first question. Please go ahead. Your line is open.
spk03: Hey, this is Randy Givens from Jefferies. Can you hear me? Hi, hi, Andy. Yes, I can hear you now. How are you? Howdy, Jerry. Doing well. How's it going? Not bad. All right. I got a couple questions just looking at your... sizes. And then secondly, any updated timing or thoughts around dropdowns, right? Are we looking at LNG or kind of staying in the container ship family?
spk01: Thank you, Randy. So with regard to the CAPE, as I said in my prepared remarks, I think waiting this out has paid off. We have seen definitely an increase, a pickup in asset prices for CAPEs. I think the CAPE amendment, you can safely say, has seen over the last 12 months a pickup in value of more than $10 million. Looking at the forward curve and dry bulk fundamentals, I think there's still strength in that, so we want to see how the next month or so fares. If we see additional strength in the charter market, hopefully that will translate into an even higher price, and we would be definitely very much alert if we are to take advantage of that market. So we are still being opportunistic. So far it has paid off, but it is very much to the forefront of our mind to at some point divest of this asset. And the reasons behind that is that it's a dry bulk vessel. If you don't want it, it's a bit... outside what we have been doing so far. But importantly, it's more difficult to secure long-term charters for a vessel like that. Of course, this might change. We have seen things that we have never seen before in the container market, so never say never. So that's one thing. With regard to drop-downs, we are definitely working on that. You know, we are sitting on a very comfortable, if you want to call it that, liquidity position. And we want to take advantage of that. And we are working towards... towards having a plan for acquisitions going forward. Just to give you an idea, pro forma for the sale of the other vessel, as of June 30th, our liquidity will increase to approximately 160 million. That is, of course, before taking into account any cash left in our balance sheet after paying out distributions going forward. If you were to use recommended reserves under operating surplus as a proxy for, you know, additional cash for the next quarter, that was 13.3 million. If you adjust this for the sale of the Maddalena, you can, I think, comfortably come up with a number close to 170 million as of liquidity as of quarter end for the third quarter. Just as a side note, our market cap today is 220 million, so effectively, you know, you're getting the rest of our fleet plus the associated cash flows for less than 50. Anyway, setting this aside, this means that we will have a war chest, let's say, of close to 150 million. I think we would focus first on the LNG carriers simply because these vessels are in the water and they can generate returns from day one, and this is something that we are looking at very closely. In addition, these are brand-new vessels, so they will tick the box. That is very important to us to bring down the average age of our fleet. They are... very environmentally friendly, and to make this a little more tangible, not to just use the generic word, you know, terminology, it will actually bring down the carbon intensity of the fleet. And this is, as I said, very important, as well as the other emissions that we have been looking at in terms of the partnership. And, you know, estimating an EBITDA of $18 million to $20 million per vessel, you know, it could be quite significant. I think by innovating the debt, we potentially could complete two or three acquisitions just with our own liquidity, maybe plus some incremental capital. And, again, just to give you a bit of a sense of the relative magnitude of I said EBITDA of $18-20 million per vessel when our first half 2021 EBITDA, excluding the gain from sale, amounted to $53 million. So that's quite significant. Now, if we can source external capital going forward, including preferred equity or debt instruments, as well as other primarily non-dilutive securities, we will endeavor to complete a larger acquisition. But I think with our liquidity position, we can deliver significant growth in the short term, and hopefully we will have more news in the coming weeks, if not months.
spk03: Yes, sir. And then, yeah, I guess in terms of other uses of cash,
spk01: Sure. As far as the unit buybacks, we have set a program of $30 million. We have set a program within the allowed parameters to buy back units. And since inception of the program, I think that was February 19th, we have acquired 353 units. 1,200 common units at an average cost of 11.7 per unit. So we have spent approximately 4.1 million. I think given the size of our buyback program and the liquidity of the stock, and if you see this combined with our common unit distribution, we are well on track. As far as the unit buyback program is concerned, the dividend increases, for example, you know, as we have discussed at this juncture, I think it's a better way to return capital to our unit holders. That is, of course, in addition to our stated common unit distribution policy. We are getting two birds with one stone. That is, we are returning capital to unit holders, but at the same time, we are taking advantage of this So I think it's a good way to do that. Sorry, and your second question, Randy?
spk03: Just about the dishes.
spk01: Yeah, look, I think we will try to balance returning capital, be it through distributions or even buybacks, with growth. In the end, you have also to look at the longer term. We have to make sure that we replenish our asset base. Many of our vessels come off charter in 2024, 2025. Some of them will be reaching also their fourth special survey anniversary. Who knows how the market is going to be by then. And in the end also, value dislocations, value gaps, like the one we are experiencing, tend to close more efficiently by... So your line keeps cutting out. Hi, sorry. Please continue. Sorry, there seems to be some issue. I don't know. Randy, where did you lose me?
spk03: Something about you're going to buy back 20 million of units this month.
spk01: No, I did not say that. Sorry. But I might have been wishful thinking.
spk03: So I was saying that... You're going to balance unit buybacks with distribution.
spk01: that you have to do both because, in the end, value gaps like the one that we are experiencing today, you know, and from past experience also with other companies, they don't just close with unit buybacks. I think larger companies, larger market caps, liquidity in the trading of the shares typically is also a good way to close value gaps. So I think we have to balance both. That is, returning capital to unit holders, but also growing the fleet. All right.
spk03: Well, that's it for me.
spk01: Thanks so much. Thanks, Randy. Good to talk to you.
spk03: You too.
spk02: Thank you. We will now take our next question. Please go ahead.
spk04: Hey, Jerry. This is Ben Nolan. Hopefully you can hear me okay. I'm on my cell here. I've been... Yeah, hey, good. So I wanted to dig in a little bit more. First of all, you're pretty thorough, so you don't need to be on the table for me. But I wanted to dig in a little bit more on, it certainly sounds, you made it abundantly clear that LNG is sort of the priority more so than the container ships. And I think in your prepared remarks, you said that it was your view that, or Capital's view, that LNG is an inflection point. I was hoping that maybe you could just dig in a little bit more into that sort of fundamental, you know, investment thesis. What gives you confidence that LNG is, in fact, an inflection point and it's the right move? Okay, sure.
spk01: Can you hear me? Yeah. Yeah, good, good. So firstly, with regard to the containers, I think these are really very suitable assets for us The only reason that I think we will look at the LNG first is that they are in the water and they can deliver returns. But it is something the containers with the long-term contracts to HAPAC, I think that would be very nice assets for CPLP as well, but that's something that we can look at subsequently. Now, with regard to LNG, so I think that's also where our relationship with Capital Maritime is quite useful, because we get the unique advantage point, if you want, of all main commercial shipping markets, that is, containers, tankers, bulkers, and LNG carriers. And, you know, stating the obvious, not all markets move together and different opportunities arise in different markets. Our business model is that of assets that have medium to long-term charters in place. So we always pursue cash flow visibility and tangible accretion in our transactions. Now, when you look at the LNG market, it does look as if it's at the turning point. And we have seen the charter market there improve rapidly over the last few months. And the LNG industry enjoying very strong prospects. That is, I mean, you can look at the long-term fundamentals and we can, that's maybe a whole different call, but you can look at LNG production, which I know that you look at very closely and is expected more or less to double over the next 15, 20 years. There is demand in the Far East and Southeast Asia, which is growing quite rapidly as LNG replaces coal in the energy mix, which leads to higher ton-mile demand. And LNG remains probably a very real and viable alternative to reduce carbon emissions both onshore and offshore. You have seen how LNG has been in more demand in Europe as carbon taxes, carbon credits have been increasing in price. And I do think as the regulatory process becomes stronger, we expect LNG demand to increase in the short to medium term. And at the same time, when you look at the supply of ships, the order book is almost everything is spoken for, you know, for specific charters or projects. There is increasingly very little space in shipyards because other segments are competing, predominantly containers, up to a large extent also tankers. New building prices are coming up very quickly. We have seen an uplift in asset values across, but also for LNG carriers. And as a function of that, and of course underlying demand, charter market is also increasing. And finally, as far as we are concerned, There was, if you want, an issue, an investment deterrent in the past when it came to LNG, which was technology, propulsion and cargo containment technology. I think that has now reached a plateau. There are no visible technological changes in the near future. There are, of course, improvements that will happen all the time. But that gives us confidence about the useful life of our assets. And finally, as I said earlier on, because we do think that emissions is going to be a very important matter going forward, not just because of the wider ESG discussion, but also because you will be able to translate that into financial gain or loss if, for example, you have much older inefficiencies. LNGCs can meaningfully improve the environmental footprint of CPLP, and it's a real technology. It's a viable technology. It's a tested technology that... We all know there are many other competing technologies or alternatives on paper, but all of them are still in the remote future when it comes to seeing long-haul commercial vessels propulsion.
spk04: Okay. Well, Thoreau, as always, I appreciate that, Jerry. And then just to remind, I think we How are you thinking about the multiple? Is it nine, nine and a half, something like that, is sort of where you feel is appropriate capital outlay or cost of capital relative to sort of your other alternatives?
spk01: That, I think, is something that will be determined by the discussion between the board and Capital Maritime, the conference committee and the Capital Maritime. Of course, LNG carriers tend to have a longer useful life than your average container or dry-bulk vessel, so you tend to see slightly higher multiples, but I think But I think I will be able to have more color on that after there has been an agreement on the transaction.
spk04: Okay. And then lastly, you know, you outlined these assets, and I think in your reserves that only in the past you've acquired assets from the sponsor here. But it's a big world, a lot of ships out there. Do you think there's any possibility at all of looking for assets outside of sponsors, unfortunately?
spk01: For sure. And we are very much alert to opportunities outside Capital Maritime, but it's not... necessarily easy to find what we're looking for, that is, assets with long-term charters, and especially a seller that is willing to wait for our process to complete. So there are advantages to having a pipeline of assets from Capital Maritime. In addition, I mean, we have been looking at, for example, second-hand acquisitions in the container market, but there we find that it is difficult to come to terms with residual risk. I think, in a way, residual risk is being undervalued at this point because we do not know the exact impact of the new regulatory regime, and I think that that especially for older vessels we might have a much higher depreciation going forward. So it's not an easy market. The dry bulk market has seen also prices increase quite rapidly. So it is, and it's a very fast-moving market.
spk04: Yeah, I agree. And it's good to hear you say that. I think you and I share similar views there that the market maybe is not appropriately looking at residual value risk fully and letting near-term opportunities shadow the long-term risk. But that's where you're seeing things as well. All right, I appreciate it. Thanks, Jerry.
spk02: Thank you. This was our last question. I would now like to hand the floor back to Jerry Kaloyiratos for his closing remarks. Please go ahead, sir.
spk01: Thank you all for joining us today. We wish you a great weekend.
spk02: Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for participating, and you may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-